Marketing Due Diligence by McDonald, Smith, and Ward

Notes adapted from the book Marketing Due Diligence, 2007

A route to creating sustainable competitive advantage.

Marketing as a discipline has failed during the past 50 years by concentrating on promotion rather than on developing world-class marketing strategies.

Former US Army Intelligence Agent
Also Known As The
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Three major challenges:

  1. maturity in demand
  2. globalization – enormous economise of scale and scope
  3. power to customers

Role of marketing

To define markets and understand the needs of the segments, then to formulate strategies for meeting these needs.

However, it is entirely possible to create sales and profits whilst destroying sharehdoler value (i.e. returns lower than the cost of capital). The board need a way of measuring the risk associated with a marketing strategy.

Challenges facing organizations

  • Market maturity
  • Diffusion of innovation.
  • Any company that doesn't put the customer at the centre of their busienss strategy is domed to failure
  • Globalization
  • Customer power
  • Market polarization – markets occupied only be the very large and the very small.

From tactics to strategy

Marketing is a process for:

  • Defining markets
  • Quantifying the needs of the customer groups (segments) within these markets
  • Putting together the value propositions to meet these needs, communicating these value propsoitions to all those people in the organization responsible for delivering them and getting their by-in to their role
  • Playing an appropriate part in delivering these value propositions (usually only comunications)
  • Monitoring the value actually delivered

Summary of marketing map page 17.

Marketing must work from three different levels:

  1. The board must understand and enthusiastically embrace the notion that creating and maintaining customer satisfaction is the only route to long-term profiable success
  2. Business strategies must start with and be evaluated against the needs of the market
  3. Tactical marketing must be witin the context of the market-led strategies.

Shareholder value

Shareholder value is generated when the net present value of the cash flows is positive. Shareholder value, the combination of share price and dividends, is directly linked to the risk-adjusted rate of return achieved by the company.

  • Marketing strategy – the optimum choice of target customers and value propositions leads to…
  • Customer preference – …the differential selection of one supplier over another, resulting in…
  • Superior returns – …greater market share, higher margins or both, which constribute to…
  • Shareholder value – …higher dividends, higher share price or both

Sustainable creation of shareholder value can only be achieved by providing shareholders with a total return, from capital growth and dividend yield, that exceeds their risk-adjusted required rate of return for this particular investment.

Map of the marketing domain page 21

Marketing Return On Investment

"The understanding of how we assess different levels of marketing effectiveness also requires that we destroy once and for all one of the great myths of such measurement – marketing return on investment. To use such terms is to accept the implicit assumption that marketing expenditure can be simply and directly linked to sales and profits. The inaccuracy of such an assumption is neatly summed up in a Harvard Business Review article:

'Measuring marketing performacne isn't like measuring facotry ouput – a fact that many non-marketing executives don't grasp. In the controlled environment of a manufacturing plant, it's simple to account for what goes in one aend and what comes out the other and then determine productivity. But the output of marketing can be meaured only long after it has left the plant' – McGovern G.J et al, Harvard Business Review, Nov 2004

Normal accounting treatment for marketing expenditure does not classify even such long-term marketing activities as true financial investments, with all marketing expenditure being written off in the current year's profit and loss account.

Strategy

Strategy decisions = resource allocation decisions

  1. What is the business of this SBU?
  2. Where will its growth come from?
  3. How will it be achieved?

Business plans at the highest level say the same thing with three basic assertions:

  1. The market is this big
  2. We're going to take this share of the market
  3. That share will make this much profit

Business risk is the combined risk of those 3 assertions:

  1. Market risk – the risk that the market may not be as big as promised in the plan
  2. Share risk – the risk that the strategy may not deliver the share promised in the plan
  3. Profit risk – the risk that the strategy may not deliver the margins promised in the plan

Market Risk

Markets are groups of people… Products are bundles of benefits… Market rises arises by a company attempting to match one with the other.

  • Strategy (doing the right things): Ineffective vs Effective
  • Tactics (doing things right): Efficient vs Inefficient

The goal: Effective strategy and efficient tactics.

Sub-components of market risk:

  1. Product category risk
  2. Market existence risk
  3. Sales volumes risk
  4. Forecast risk
  5. Pricing risk

Market definitions shouldn't be made in product terms… 'bundle of benefits'.

Market definition should be described in terms of a customer need, in a way which covers the aggregation of all the alternative products or services that customers regard as being capable of satisfying that same need.

Market definition is crucial for:

  • Share measurement
  • Growth measurement
  • Specification of target customers
  • Recognition of relevant competitors
  • Formulation of marketing objectives and strategies

Share risk

Share risk is the risk that the strategy will not create the degree of customer preference or competitive advantage needed to create the planed market share.

5 component risks:

  1. Target market risk
  2. Proposition risk
  3. SWOT risk
  4. Uniqueness risk
  5. Future risk – the microenvironment with three areas of customer change, competitive change, and channel change

An objectively moderated view of the probable share can then be combined with the expected market size to calcualte the likely future revenue of the SBU.

The essence of reduced share risk is effective segmentation, targeting and positioning.

Homogeneity and distinctiveness of the target market ar the two most telling characteristics of a strategy with low targe tmarket risk.

Kotlers acronym for a good segment: HDAV: Homogeneous, Distinctive, Accessible, Viable.

  1. Homogenous: Are all the customers in that segment driven by the same movitations and needs, or are tey simply grouped according to your data?
  2. Distinct? Does each segment recognise itself as having distinct needs, or do some customers in that segment have more in common with those in other segments?
  3. Accessible? Can you reach the segment you have identified via communication and distribution channels?
  4. Viable? Is the segment big enough and stable enough for it to be worthwhile?

Profit risk

Highest level of this risk is seeking to grow profits aggressively from a high existing base in a highly competitive market with a declining total profit pool and increasingly sophisticated customers.

Sub-components of profit risk:

  • Profit pool risk
  • Profit sources risk
  • Competitor impact risk
  • Internal gross margin risk
  • Other costs risk

Due Diligence Therapeutic Process

A market trader many years ago, on having it pointed out to him that exactly the same apples at opposite ends of his stall were pried at 20 cents and 25 centrs, replied that the 25-cent apples were especially for the customers who wanted to pay 25 cents.

Market defined as: the aggregate of all the products or servies that satisfy the same need

Market segmentation process:

Decomposing a market into a number of actal behaviour patterns according to what is bought, where it is bought, when it is bought, how it is bought and , finally, according to who buys, which are then understood in terms of why it is bought. This will result in a number of micro-segments, of which there could be around 20 or 30. It is then a comparabitvely simple proess to cluster these micro-segments until there are seven or eight groups reminaing These are the final segments, on which all strategic decisions should be based.

2 pillars of marketing

  1. Correct market definition
  2. Market segmentation

Market mapping shows publishers > distributors > resellers > consumers

If you don't understand the way your market segments think, everyting else you do is flawed – your compay will only surivve as long as your copetitors remain similarly ignorant.

Perceptual maps pg 165

Summary of market segmentation:

What is bought:

  • physical characteristics
  • where bought
  • when bought
  • how bought

Who buys

  • Demographics
  • Socio-economics
  • Brand loyalty
  • Heavy/light users
  • Personality, traits, lifestyles

Why

  • Benefits
  • Attitudes
  • Perceptions
  • Prefernces

Strategy Creation

Strategy is a pattern of resource allocation decisions – Henry Mintzberg

  • Core product
  • Extended product – including service and optional extras
  • Augmented product – status and emotional associations, ownership experience
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